Trump policies may cause an initial global and US economic downturn

Source: Supplied. Chief economist and advisory partner at Citadel, Maarten Ackerman.

Source: Supplied. Citadel's chief investment officer, George Herman.

“While Trump’s proposed ‘America First’ policies are about economic growth, the irony is that protectionism will be creating its own set of economic headwinds. Inflation – which is a global problem - won’t disappear overnight.”

Ackerman explains: “With the Senate secured by the Republicans and the House still undecided, the potential for a 'red sweep' raises expectations that the party could more effectively pursue its global macroeconomic and domestic economic policies aimed at fostering economic growth and reducing inflation.

"These policies may, however, initially have the opposite effect of what he promised, as the Republicans’ hardline immigration policies will impact the availability of affordable labour and their trade policies won’t make inflation disappear overnight.

“Trump wants to produce in America. His protectionism will lead to a stronger dollar, which is exactly what he wants, and will also further slow down global trade. In addition, his proposed tariffs on imports will further slow trade and hike inflation.”

Having called ‘tariff’ his “favourite word in the dictionary”, Trump promised 200% trade tariffs on Mexican cars and 60% tariffs on certain Chinese products.

Citadel chief investment officer, George Herman adds that Republican policies could cause “the largest ever impact on the fiscal deficit”. “The US deficit is almost twice the size it was in 2016. We're probably going to get to Covid levels, which was a very unusual time with a lot of spend from government to get the economy going.

"The US will keep on borrowing, but the cost of borrowing will need to increase. Looking at government debt in relation to gross domestic product (GDP), the already enormous US debt-to-GDP ratio of 125% is expected to rise to 140% of GDP by 2035.

“In an environment of cutting corporate and wealth taxes, short-term that can be quite positive for equity markets. However, where will you get the revenue from to actually finance a deficit like this?” Ackerman lamented.

Initial global market reactions to Trump's 'Red Sweep'

“The market reactions last week were severe,” says Herman. “The dollar strengthened materially, and several asset classes were affected right away. As expected, ‘Trump Trade’ was priced into the market, but the ‘red sweep’ was not priced in.

The gold price went down a good 5%, on the back of his promise to ‘end the Ukraine conflict in 24 hours’. The copper price also took a 5% smack, because Trump has made it clear he is not a fan of renewables and has promised to ‘drill, drill, drill’. Bitcoin on the other hand – which is firmly backed by Trump and his friend Elon Musk – reached a new all-time high of $75,000,” says Herman.

“Trump will cut corporate taxes, which is good – in the short-term - for the equity markets. We saw the S&P500 up 2.5%, the Nasdaq up 2.5%, and the Russell 2000 which contains smaller cap stocks up 6%, the Dow Jones up 3-3.5%.

"These movements, however, were a US phenomenon and speak to US exceptionalism, and are not reflected in other global equity markets.”

Turning to US treasury yields, Herman explains that it sold off by 20 basis points last Wednesday, on top of 60 points in the build up to Trump’s re-election.

“This is an enormous move, considering that it usually moves by only two to three basis points on any given day. Now consider that in 2022, when US yields sold off as aggressively, it throttled the equity market and equities took a step back.

"We haven't seen that yet. We've seen the opposite now where equities rally while bond yields are going higher. So, this higher cost of debt will filter through into the economy.”

Herman cautions that while US equity is much stronger in the short term on the back of the promise of lower corporate taxes and higher US yields, there is a fear in the market of increased overall debt levels for the US.

Impact of the Trump presidency on South Africa and other emerging markets

“The knock-on effect of a stronger dollar is very important to us in South Africa, as it places our commodities under pressure and is negative for emerging markets.”

Another emerging market that will be hard-hit by Trump’s adversarial stance is Mexico. “Mexico is a sensitive issue for America, specifically because of illegal immigrants. Trump will impose mass deportations and high trade tariffs.”

While the protracted trade conflicts have already made China more self-sufficient, which meant that Trump’s re-election was “no real body blow to China”, China would have to focus on finding more alternative trade partners, says Ackerman.

“First, China needs to move to a policy of self-reliance, on energy or trade. That's why they're trying to stimulate consumption expenditure in the Chinese economy. If they're going to replace American trade, it will most likely be with other emerging countries, specifically in Africa. So, it's a totally new world post-Covid as to how these alliances and trade partners get put together.”

Explaining the impact of trade tensions on global supply chains, Herman says: “In this new world of re-globalisation, or de-globalisation, of new trading partners, we've abandoned the most efficient, cheapest logistical supply chains in products, for ‘friend-sharing’, trading with friends or alliances, which implies higher prices and more inflation.”

Herman believes Brics may provide some new opportunities for South Africa in the new world order. “Brics started showing muscle against the West over the past five years. The G7 and the Brics are pretty much head-locked in some policy decisions. And Africa is right in the middle. It will create some opportunities for Africa and the emerging markets.

President Cyril Ramaphosa was also quick to emphasise that South Africa takes over the G20 presidency in 2025, and in 2026 it is taken over by the US.

It is clear that the president wants to build relations during this period. Minister of International Relations and Cooperation, Ronald Lamola, has been quite outspoken about anti-West, anti-American views.”

This doesn’t bode well for South Africa’s place in the Agoa trade agreement under a Trump administration.

Conclusion

“The world is entering an environment with below-average growth and sticky inflation. The trade conflict is now global. Geopolitical challenges may intensify. We are preparing for a slow growth environment. Interest rates can decline further, but we're probably not going to go to pre-pandemic levels,” says Herman.

It is therefore more important than ever to have well-diversified, long-term and weather-proof investment strategies. “Politicians come and go. There are shorter-term opportunities, and we will definitely include that in our portfolios, but the thinking must always be long-term and adjusted for risk.”